The Business Cycle and Profitability of Trading Strategies

Abstract

Recent studies show that investor participation in the stock market rises during economic expansion and drops in economic recession. When investor participation is high, investors’ cognitive and behavioral biases are likely to have a strong influence on stock prices. We consider four trading strategies that are based on well-known market anomalies and examine their profitability under different economic conditions. For all four strategies, the portfolios that are formed in the months when the economy is expanding obtain significant profits, whereas the portfolios formed in economic recession months are not profitable. This finding is robust to different ways of classifying recession months.

Keywords

business cycle / investor preference / January effect / lottery-type stock / trading strategy

RIGHTS & PERMISSIONS

2017 Higher Education Press and Brill